Two Years after Recovery Act, Policymakers Fixated on Wrong Deficit

State and federal lawmakers should focus on a deficit of jobs and wages on Main Street America, building on the Recovery Act and other actions that have saved 400,000 jobs in Pennsylvania

HARRISBURG, Pa., Feb. 17, 2011 /PRNewswire-USNewswire/ -- The key to reining in the federal fiscal deficit lies not in job-crushing spending cuts and tax breaks for the rich but in policies that create new jobs and boost middle-class wages, according to a new policy brief from the Keystone Research Center.

Prolonged joblessness and stagnant wages will continue to stifle tax revenues. By closing these deficits, policymakers can rein in the fiscal deficit, while building on the success of the American Recovery Act and other federal policies, which saved 400,000 jobs in Pennsylvania and prevented the state's unemployment rate from rising above 15%.

"Policymakers remain fixated on the wrong deficit," said Stephen Herzenberg, Ph.D., an Economist and Executive Director of the Keystone Research Center. "For Main Street families, the jobs deficit and the wage deficit matter a lot more than the federal fiscal deficit."

Congressional Republicans, however, are pushing for deep cuts to federal spending a few months after insisting on billions in new spending to continue Bush era tax cuts for the richest 2%.

"Pairing tax cuts for the rich with job-crushing spending cuts risks a worst-of-both-worlds outcome where the economy slips again, and the jobs, wage, and fiscal deficits all grow," said Dr. Herzenberg, who co-authored the policy brief with Labor Economist Mark Price, Ph.D.

Pennsylvania is emerging from the recession with job growth exceeding that of many other states. In 2010, the Commonwealth added more than 65,000 jobs, ranking third among the 50 states in the number of jobs created. Adjusting for the size of each state's economy, Pennsylvania job growth still exceeded three-fourths of all states.

"Continued investments in infrastructure, boosting skills and innovation in critical industries, and in unemployment benefits are key to keeping our economic momentum going and reining in the job deficit," Dr. Price said. "A starting point on the wage deficit would be to raise the minimum wage -- an action taken to help end the Great Depression -- and requiring that companies receiving state job-creation subsidies not pay below market-based norms for their industry."

Saturday is the two-year anniversary of Congress's passage of the American Recovery and Reinvestment Act. To mark the occasion, Keystone researchers have updated an earlier analysis showing how many jobs the Recovery Act and other federal actions saved in Pennsylvania and its metropolitan areas. The estimates are derived from a national-level analysis of the impact of federal economic intervention that was co-authored by economist Alan Binder and John McCain economic adviser Mark Zandi.

Pennsylvania's economy would have been much worse off without the policy actions taken by the Federal Reserve, the Bush and Obama administrations, and Congress in the wake of the Great Recession. Unemployment rates (as of December 2010) would have spiraled to:

20% in the City of Philadelphia and nearly 15% in the Philadelphia metro area, including Bucks, Chester, Delaware, Montgomery and Philadelphia counties and parts of New Jersey and Delaware (117,000 jobs saved);

17% in the Scranton-Wilkes-Barre metro area (17,000 jobs saved);

Nearly 17% in Erie County (6,000 jobs saved);

More than 15% in Altoona (more than 5,000 jobs saved);

15% in the Allentown-Bethlehem-Easton metro area (nearly 27,000 jobs were saved by federal intervention);

15% in the Pittsburgh metro area (80,000 jobs saved);

More than 15% in the Reading metro area (about 10,000 jobs saved);

Nearly 14% in the York-Hanover metro area (nearly 15,000 jobs saved);

13% in the Harrisburg-Carlisle metro area (21,000 jobs saved);

More than 11% in Lancaster County (nearly 14,000 jobs saved).

"By acting forcefully when the economy was on the verge of collapse, policymakers applied the historical lessons of the Great Depression," Dr. Herzenberg said. "Pulling back now will cost jobs and set the recovery back. Those who forget history, as the saying goes, are doomed to repeat it."